Home buyers have been fortunate in recent weeks as mortgage rates have repeatedly hit record highs. But people who need a specific type of mortgage, called a jumbo loan, may need to shop around more than usual for the lowest rate. Here’s why.
6 simple tips to get a 1.75% mortgage rate
Secure access to The Ascent’s free guide that reveals how to get the lowest mortgage rate on your new home purchase or when refinancing. Rates are still at their lowest for decades, so act today to avoid missing out.
By submitting your email address, you consent to our sending you money advice as well as products and services which we believe may be of interest to you. You can unsubscribe anytime. Please read our Confidentiality declaration and terms and conditions.
Added challenges to secure the lowest jumbo loan rates
Jumbo loans are mortgages that exceed loan limits set by the Federal Housing Finance Agency (FHFA). The FHFA sets maximum loan limits based on guidelines from Fannie Mae and Freddie Mac. These two government-sponsored entities buy mortgages from lenders and hold or repackage them for investors in the form of mortgage-backed securities.
Don’t be put off by technical jargon. Basically, this means that the organizations that buy most of the mortgages in the country will only buy loans up to a certain dollar amount. For 2020, that loan limit is $ 510,400 for single-family properties in most areas of the country and $ 765,600 for loans in some more expensive areas. If you are borrowing more than that, you will need a jumbo loan.
Your lender will not be able to sell a jumbo loan to Fannie Mae and Freddie Mac. Instead, he has to keep the loan on the books or go through a different process to find investors to buy it. And right now, during the time of COVID-19, banks and investors aren’t buying a lot of jumbo loans.
This means that it is not easy to offload jumbo mortgages, so many lenders find themselves stuck in owning the loans they approve and finance. In turn, fewer lenders are willing to make these loans. The result, according to the Mortgage Banker Association’s Credit Availability Index, is that consumers had 57% less access to jumbo loans in July compared to the previous year.
Additionally, lenders who provide jumbo loans do not use the uniform guidelines issued by Fannie Mae and Freddie Mac. Instead, they set the eligibility requirements and rates based on their own balance sheets. This is why there is a great variation in the interest rates from one lender to another. Many financial institutions offering jumbo loans do not even try to compete with the rates offered by competitors.
This has led borrowers to receive very different rates from different lenders. In fact, before COVID, there was rarely more than 0.1% difference in loan offers made to the same buyer by a group of eligible lenders. But now the range could be 0.5% or more. And that can make a huge difference in monthly payments and total interest charges, especially when shopping for a large mortgage.
What Should Home Buyers Do?
Since jumbo loan rates can vary wildly from lender to lender, those looking for a large mortgage should definitely shop around. In fact, while most potential buyers should get quotes from around three different lenders, those looking for a jumbo loan may want to try five or more different mortgage providers to see who will offer the most competitive rate.
Buyers should also see if a bank they already do business with is more willing to offer a loan. If you’re looking for a jumbo loan, don’t limit your search – think about credit unions, local banks, large national banks, and online lenders. Working with a mortgage broker can even make sense, as brokers can help connect you with wholesale lenders. And you can always ask your preferred lender to offer you the best rate, although there is no guarantee that they will.
While it takes a bit more legwork, there are still opportunities for those looking for a jumbo mortgage to get an affordable loan – you just need to take the time to find competitive jumbo loan rates. It’s worth it.